Fintech is short for financial technology. The technology has wrought significant changes in the way the financial industry functions. And the COVID-19 pandemic has accelerated the use of fintech because of the convenience it offers in executing financial transactions.
Fintech companies have risen to the occasion by meeting consumers' ever-increasing demand for payment simplicity, money management, and access to easy credit. The popularity of fintech companies has forced traditional financial institutions to make technological investments to compete. The fintech industry is expected now to witness another boom on newer trends, such as buy-now-pay-later (BNPL), neo banks, and platform-as-a-service (PaaS). According to a Kenneth Research report, the global fintech market is expected to reach $305.70 billion by 2023, growing at a 22.2% CAGR.
Although the fintech industry is expected to witness significant growth, fundamentally weak stocks in this space, Robinhood Markets, Inc. (HOOD), SoFi Technologies, Inc. (SOFI), and PagSeguro Digital Ltd. (PAGS), are trading at lofty valuations. Hence, we think it could be wise to avoid these stocks.
Robinhood Markets, Inc. (HOOD)
Headquartered in Menlo Park, Calif., famous financial services platform provider HOOD is focused on developing an application for cash management, including stocks, ETFs, options, and cryptocurrency. The company’s platform provides trading in U.S. listed stocks, exchange-traded funds (ETFs), options, American depository receipts (ADRs), and cryptocurrencies.
HOOD’s operating expenses increased 162% year-over-year to $783.14 million for the fourth quarter, ended Dec. 31, 2021. The company’s net loss came in at $423.26 million, versus $13.02 million in net income in the year-ago period. Also, its adjusted EBITDA loss came in at $86.84 million, compared to adjusted EBITDA of $79.19 million in the year-ago period.
In terms of forward P/S and P/B, HOOD’s respective 5.52x and 1.44x are higher than the 3.20x and 1.14x industry averages. The company’s EPS is expected to remain negative this year and in the following year. In addition, analysts expect its revenue for the quarter ending June 30, 2022, to decline 22.9% year-over-year to $402.33 million. Over the past six months, the stock has declined 74.1% in price to close the last trading session at $11.49.
HOOD’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Stability, Sentiment, and Quality and a D grade for Value. It is ranked #161 out of 165 stocks in the F-rated Software – Application industry. Click here to see the other ratings of Growth and Momentum.
Click here to check out our Software Industry Report for 2022
SoFi Technologies, Inc. (SOFI)
Digital financial services company SOFI, in San Francisco, operates through lending, financial services, and technology platform segments. Its lending segment offers student loans, personal and home loans. In contrast, its financial services segment provides cash management and investment services through SoFi Money, SoFi Invest, SoFi Credit Card, and SoFi Relay. And its technology platform segment offers the benefits of Galileo and Apex.
For its fiscal fourth quarter, ended Dec. 31, 2021, SOFI’s noninterest expense increased 52.5% year-over-year to $395.06 million. The company’s net loss widened 34.3% year-over-year to $111.01 million. And its adjusted EBITDA declined 61.1% year-over-year to $4.59 million.
In terms of forward P/S and P/B, SOFI’s respective 6.38x and 2.20x are higher than the 3.20x and 1.14x industry averages. The company’s EPS is expected to remain negative this year and next year. Over the past nine months, the stock has declined 50.1% in price to close the last trading session at $11.58.
SOFI’s POWR Ratings reflect these bleak prospects. It has an overall F rating, which equates to a Strong Sell.
It has an F grade for Value and Stability and a D grade for Sentiment and Quality. Within the D-rated Financial Services (Enterprise) industry, it is ranked #110 out of 113 stocks. To see the additional ratings of SOFI for Growth and Momentum, click here.
PagSeguro Digital Ltd. (PAGS)
Headquartered in Sao Paulo, Brazil, PAGS is a fintech company that offers multiple digital payment solutions to micro-merchants, small companies, and medium-sized companies. Its end-to-end digital ecosystem helps its customers accept payments and manage their businesses.
PAGS’ cost of sales and services for the nine months ended Sept. 30, 2021, increased 50.5% year-over-year to R$3.94 billion ($0.76 billion). The company’s net income declined 5.6% year-over-year to R$865.01 million ($168 million). And its EPS came in at R$2.6019, declining 6.3% year-over-year.
In terms of forward Price/Cash Flow, PAGS’ 23.53x is higher than the 18.86x industry average. Over the past year, the stock has declined 74.5% in price to close the last trading session at $15.30.
PAGS’ weak prospects are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our rating system.
It has a D grade for Value, Stability, Sentiment, and Quality. It is ranked #112 in the Financial Services (Enterprise) industry. Click here to see the other ratings of PAGS for Growth and Momentum.
HOOD shares rose $0.02 (+0.17%) in premarket trading Thursday. Year-to-date, HOOD has declined -35.30%, versus a -7.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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